Big business still dodging the tax issue

What do corporate accountability and corporation tax have in common? Not much, judging from the myriad of statements by born-again corporations and their advisers schooled in the dark arts of public relations.

Last month, The Observer asked why the burgeoning Corporate Social Responsibility (CSR) industry has comprehensively failed to make the fair and transparent payment of tax a core issue.

This begs the question as to whether, in a world of footloose capital, big business is having the last laugh as the tax burden is silently shifted to small business and individuals? No-one seems to know the answer, not even the leading think-tank, the Institute of Fiscal Studies.

'This is an extremely interesting question but there is no comprehensive research available, due largely to the difficulty of obtaining data about big business,' says its research economist, Alexander Klemm.

In the late Nineties, Deloitte & Touche did hazard an estimate that Europe-wide tax dodging was worth almost £100 billion a year. In the UK, tax avoidance is reckoned to cost in the region of £20bn. Meanwhile, one academic report estimates that transfer pricing - the means by which money can be moved from one country to another to avoid high taxes - is costing the US Treasury $53bn (about £33bn). This estimate so alarmed then US Treasury Secretary Paul O' Neill that he granted $2 million to the report's authors to provide more detailed analysis.

But perhaps the real victim of accounting sleight of hand is the developing world, where tax avoidance and the severing of the social contract between business and society is costing governments well over $50bn a year.

While these figures are admittedly the stuff of extrapolation, two numbers resonate when it comes to tax planning, as it's innocently called. According to data compiled by Accountancy Age , the combined UK fee income of the Big Four auditors stands at £5.8bn, while the annual budget for the Inland Revenue's Large Business Office is £37m.

So this is a David and Goliath contest, and there is little substance to the claims that big business can put its own house in order.

On more tangible issues such as labour rights and the environment, the progressives of Nike, McDonald's, Wal-Mart and Gap reveal themselves as little more than obsessive-compulsives incapable of putting their bad ways behind them without the periodic shock therapy of the sweatshop scandal or consumer boycotts.

Have any of these villains of consumer capitalism been put on the rack to answer questions about taxation? Not likely. The present laws on financial reporting are not even distant cousins of CSR.

For instance, it is impossible to know each territory in which a transnational corporation (TNC) operates, nor the amount of tax paid to each jurisdiction. And transfer pricing will flourish as long as there is no obligation to report the split between third-party and inter-group trading, despite the fact that 60 per cent of world trade takes place within these firms.

So who will rein in footloose capital and the undemocratic use of tax havens? Don't bank on the institutional investors. Despite the recent dalliance with investor activism and more Socially Responsible Investment (SRI), there seems little motivation to address tax avoidance.

Yet tax planning can backfire - just ask Dixons shareholders. The closure of an offshore tax loophole announced in last month's Pre-Budget Statement is, Dixons admits, likely to add £20m to its tax bill. Since then its shares have fallen by 15 per cent and analysts have downgraded the stock.

Craig MacKenzie, head of investor responsibility at Insight Investment, the asset manager of HBOS, admits: 'Tax is not even on the periphery when it comes to responsible investing. The complexity of the subject is seen as a barrier, and we're not sophisticated enough to make sense of the answers. We need to identify the grey areas.'

Such honesty is refreshing but it leaves a scenario in which a responsible shareholder might blacklist a tobacco firm fulfilling its tax liability in favour of a pro-CSR telcoms outfit indulging in fiscal sharp practice.

Fortunately, help is at hand for pension fund activists and corporate governance teams. A new report by the Association of Accountancy and Business Affairs (AABA) shows how CSR can confront tax avoidance head on (see box).

The AABA is an independent group of accountants, economists and politicians who want to know whether TNCs are pulling a fast one.

Richard Murphy, author of the report, questions why financial reporting remains so narrow. 'What does big business have to hide? I can't think of a greater measure of corporate accountability than paying your dues. More openness and transparency will go a long way to restoring investor confidence.'

Murphy claims reporting turnover and tax by territory will shine a spotlight on TNCs in a manner in which CSR does not. In particular, stakeholders will be able to see in which countries a firm operates and make decisions about its tax charge in relation to the use of tax havens.

Host governments would be able to appraise the contribution a TNC makes to them compared with payments made in other territories. Only then will society know whether proper accounting policies are applied and that fair tax is paid.

'Reporting turnover in this way will achieve the rare distinction of directly benefiting shareholders, the CSR lobby and government. Only the TNCs won't like it,' he adds.

Yes, TNCs will be terrified at the prospect of being so open but the same rules will apply to their rivals. More importantly, there is no cost in reporting this information: it is already collected during audits before being hidden from public gaze.

The AABA claims that had this type of disclosure been adopted three years ago, it would have been much easier to spot that Cable and Wireless made no tax provision on the sale of its stake in the mobile phone network One 2 One. It might also have showed that Dixons was supporting its earnings by sheltering its profits in tax havens.

No doubt the CSR teams at the Big Four auditors will see AABA's proposals a little dif ferently. For behind the brochures and the stakeholder rhetoric sits a pinstripe mafia of tax planners and transfer price specialists whose raison d'etre is to maximise profits in an age of mobile capital.

CSR should not be an unregulated game of pick and mix. It should perhaps be reduced to a single issue: big business should pay its dues and governments should spend the proceeds.

Are you a fully paid up corporate citizen?
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How many of these are you prepared to disclose?
· All territories where you operate
· Turnover to third parties in and out of each territory
· Sales to group companies made from each territory
· Taxable profit in each territory
· Tax due on profits in each territory